OPEC Failure to Limit Output Sinks Oil Prices
Oil futures prices plunged Monday, driven by fears that OPEC would continue flooding world markets after failing to reach an accord on limiting its rampant overproduction.
On the New York Mercantile Exchange, the December contract for West Texas Intermediate, the benchmark U.S. crude, plummeted $1.20 to settle at $13.17 per 42-gallon barrel.
On Friday, the near-term contract had finished at $14.37 per barrel, off 7 cents for the week.
Prices for the December crude contract opened almost 90 cents lower Monday after ministers from eight members of the Organization of Petroleum Exporting Countries adjourned a weekend meeting without reaching common ground on production quotas.
Analysts said the price erosion reflected investor worries that OPEC would continue overproducing, pushing prices down even further. Since April, prices have fallen more than 25% due to the growing oversupply of oil.
Market participants had hoped this weekend’s OPEC meeting in Madrid would produce a new production accord that would reduce output by as much as 3 million barrels a day.
“Expectations were so high that in fact an agreement would take place that when it didn’t take place, the market sold off,” said Nauman Barakat, vice pre sident for energy investments with Prudential-Bache Securities Inc.
The 13-nation cartel is estimated to be producing about 22 million barrels of oil a day, exceeding its self-imposed ceiling by more than 3 million barrels. Observers said before the meeting that the ministers planned to set a daily ceiling of 17.4 million barrels.
Iraq is said to be the principal problem, refusing to abide by its 1.6 million barrel-a-day quota since 1986. Iraq is producing about 2.7 million barrels a day, arguing that it needs the oil revenue to rebuild its shattered economy after its eight-year war with Iran. The two countries began a cease-fire in August.
Analysts say that other quota violators fear that if they roll back their own production, Iraq will take over their market share.
Discipline Appears Absent
Recently, Saudi Arabia, the largest OPEC producer and the world’s largest exporter, began exceeding its 4.3-million barrel quota, reportedly to punish the other quota violators. One analyst said Monday that the Saudis have threatened to dump millions of barrels more of its excess inventories to “inflict maximum pain” on Iraq.
Analysts say that OPEC’s failure to reach any kind of a resolution this weekend suggested that the cartel is far from reinstituting discipline among its members.
“The fact that the meeting ended without a firm resolution confirmed the existing fundamentals--that there is too much oil on world markets and prices have to go lower,” said James Steel, an analyst with Refco Inc.
Steel predicted prices could fall another $1 before the week is out.
In a statement released after the Madrid talks ended, OPEC announced that its price planners would meet again in Vienna on Nov. 17 after consultations with their governments. A full ministerial conference is set for Nov. 21 in Vienna.
